American Financial (AFG) Buys Verikai, Invests in Insurtech
American Financial Group, Inc. AFG has acquired Verikai, Inc. in a bid to enhance its insurance operations. AFG paid around $120 million in cash at closing.
Founded in 2018, San Francisco-based Verikai is an insurance technology company that provides predictive data and risk tool for health insurance underwriters and brokers. Verikai, being a machine learning and artificial intelligence company, leverages alternative data and machine learning to minimize risk in the insurance industry. It assists insurance companies in improving underwriting precision, speed, and efficiency and offers consumers and small businesses access to a wide array of insurance products.
With this acquisition, Great American Insurance Group, one of the subsidiaries of American Financial, is likely to gain the predictive risk tool and unique Marketplace solution from Verikai as it enters the medical stop-loss business. It intends to focus on small and underserved risks.
As far as Verikai is concerned, the acquisition is expected to provide it with better growth opportunities by expanding its expertise in offering a wide range of compelling products and innovative capabilities. It sees a further opportunity to enhance its offerings and lead the predictive risk space.
Co-CEO, Carl H. Lindner III stated, “Although we don’t often invest directly in insurtech entities, we found Verikai to be an outstanding opportunity. Verikai will continue to operate as a stand-alone company to serve its insurance clients.”
In a bid to improve operational efficiency and limit costs, insurers have increased investment in technology. The property and casualty (P&C) industry witnessed the emergence of insurtech — technology-led insurers. The adoption of technologies such as robotic process automation (RPA), Chatbot and RoboAdvisory, artificial intelligence (AI) and data analytics, telematics and cloud computing is gaining steam. The adoption of technology has helped in seamless underwriting and claims processing. These are expected to pave the way for faster and more accurate decision-making as well as seamless operations while maintaining social distancing norms.
American Financial is actively involved in startups, small-to-medium-sized acquisitions, as well as product launches. AFG’s largest acquisition to date was in 2014 when it acquired Summit Holding Southeast for $250 million.
The P&C insurer expects to grow Specialty P&C businesses organically and through acquisitions to meet its target on the back of sufficient capital that provides financial flexibility. AFG expects the acquisitions to add to earnings and earn double-digit returns over time.
Price Performance
Shares of this Zacks Rank #3 (Hold) P&C insurer have gained 48.1% in a year, outperforming the industry’s increase of 20.4%. Acquisitions, better pricing and improving industry fundamentals will enable the P&C insurer to achieve operational excellence in the days ahead.
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Other Acquisitions in the Same Space
Given the insurance industry’s adequate capital level, players like Brown and Brown Inc. BRO, Arthur J. Gallagher & Co. AJG and First American Financial Corporation FAF are pursuing strategic mergers and acquisitions.
Brown & Brown’s subsidiary Brown & Brown Lone Star Insurance Services purchased HARCO to boost its presence in Texas. Brown & Brown and its subsidiaries continuously make strategic acquisitions to expand globally, add capabilities and boost operations. Also, these strategic buyouts help Brown & Brown increase commissions and fees, which, in turn, drive revenues.
Arthur J. Gallagher & Co. acquired Risk Transfer Insurance Agency, LLC. Arthur J. Gallagher boasts an impressive inorganic story. AJG’s merger and acquisition pipeline is quite strong with about $400 million revenues associated with nearly 50 term sheets either agreed upon or being prepared. The insurance broker estimates more than $2.5 billion for mergers and acquisitions, consisting of $1 billion in cash, about $650 million of net cash generation in the second half of 2021, and $600 million to $700 million of borrowing capacity.
First American Financial has agreed to acquire Mother Lode Holding Company to broaden its exposure in the crucial growth markets, enhance the insurer’s capabilities to better serve customers across the strongest housing markets as well as fortify its presence in the United States. In line with its strategic initiatives, First American actively pursues acquisitions to boost and expand its core business. The title insurer also pursued small title agency buyouts in the regions that it identifies as growth markets.
Shares of Brown and Brown, Arthur J. Gallagher and First American have gained 38.5%, 30.2% and 42.6%, respectively, in a year’s time.
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